With the combination of the height sensitivity of atomic force microscopy and the strain sensitivity of transmission electron microscopy, it is shown that near singular stress concentrations can develop naturally in strained epitaxial films. These crack-like instabilities are identified as the sources of dislocation nucleation and multiplication in films of high misfit. This link between morphological instability and dislocation nucleation provides a method for studying the basic micromechanisms that determine the strength and mechanical properties of materials.